Brooks Automation Shares Running Out Of Room To Run

Needham reassessed shares of
Brooks Automation, Inc BRKS
Monday, downgrading the shares of the company because the stock price ran ahead of the firm's previous price target of $28.

As such, the firm downgraded the shares of the company from Buy to Hold.

At the time of writing, shares of Brooks Automation were, however, rising 1.30 percent to $28.90.

Sizeable Exposure To Low-Growth Semi Business

Analysts Edwin Mok and Arthur Su are of the view Brooks Automation management has succeeded in refocusing the semiconductor business into several growth areas such as etch/dep vacuum, CCs and AP. With half of the business not growing, as they focus on slower growing areas such as ATM, robots, cryopumps and service, Mok and Su believe the total semiconductor business will perform in line with the wafer fab equipment, or WFE market and underperform names with greater exposure to the technology inflections within SemiCap.

See also: Lam Research On The Cusp Of Healthy Chip Industry Environment; Argus Initiates At Buy

Life Science Growth Already Reflected In Model

Needham believes Brooks Automation's Life Science business is growing well, as recurring sales from avenues such as sample storage, infrastructure service and consumables increase. Taking cues from the backlog and the business momentum, the firm estimates that the business is on track to reach or even exceed the 2019 revenue target of $205 million, for a 2017-19 CAGR of 18 percent.

The firm expects recurring revenue to grow from about 60 percent of the total revenue. That said, the firm said the solid growth prospects of the Life Science business is already reflected in the Street's model. Additionally, the firm expects the lumpy tool business to moderate.

"We would wait for evidence of faster adoption of the new bio-sample tool to get more aggressive on the tool business," the firm said.

Valuation Has Factored In Updated FY19 Targets

Needham said the stock has already priced in the company's updated 2019 targets of revenues of $730 million to $815 million and NG earnings per share of $1.30–$1.80. Taking the mid-point of the earnings per share guidance, the firm estimates Life Sciences would contribute to 41 cents compared to $1.60 by Semi.

"The stock is currently trading at a 26% premium over its semi sub-system peers Advanced Energy Industries, Inc. AEIS and MKS Instruments, Inc. MKSI [N/R] on a P/ E basis, which we believe already reflects the benefit of the faster growing Life Science business," the firm added.

Needham also noted that its analysis suggested the Street is already assuming Brooks Automation will be able to accelerate its fiscal year 2019 target to calendar year 2018, or three quarters earlier than target.

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